Today, mining analyst Stephan Bogner published a new research report on the precarious distortions in the zinc market and the outlook for Pasinex Resources Ltd. becoming a zinc producer.
The 10 page report explains why the zinc price has been outshining other commodities in the recent past and is trading in an upward trend, which is poised to continue for years to come and may escalate any time. Analysts agree on a global scale that zinc will be among the commodities with the most extreme supply/demand deficit and that its price can more than double until 2016.
Since years, the average mining grades are decreasing worldwide and today are less than 5% zinc. Additionally, several large zinc producing mines are about to close and as such supply is shrinking drastically.
On the other side, demand looks increasingly robust, because while the engine of the world economy is gaining traction action, zinc is more demand accordingly. In particular, zinc is needed for the manufacturing of batteries and as a steel and iron alloy to protect against corrosion. The galloping automotive demand in developing countries – hand in hand with the strengthening car sales in West Europe and North America – give an impression of how strong the demand for zinc can grow from here. Additionally, China alone claims around half of global zinc supply for their own and China’s zinc demand grew by a remarkable 8% last year (USA: 3.4%; Japan: 4%).
The result will be a widening market deficit for zinc which is likely to have started in 2014 (in which case in early 2015 – after the official announcement of a 2014 deficit – an initial price escalation is expected).
The "problem" of the zinc market is that only very few zinc deposits exist globally, which have chances of success (i.e. development to a mine), as the upfront capital expenditures (CAPEX) are typically in the area of several hundred million dollars and investors are backing away from such large financings while precious metal prices are collapsing. Hence it should not surprise that large and capital intensive projects are not profiting from a rising zinc price but are even dropping like a junior gold stock; e.g. -50% with Canada Zinc Metals Corp., whose Akie Deposit is mineralized with 8% zinc (thus above average) yet asking for enormous CAPEX to be developed into a mine.
The research reports shows quite plainly why Pasinex Resources Ltd. is well positioned to profit from the distortions in the zinc market. A total of 10 catalysts are presented to let Pasinex ascent to a mid-sized zinc producer. Significant news are expected to be published in the next weeks, e.g. the first sale of 4,000 tons of so-called DSO (“Direct Shipping Ore”; i.e. directly shippable/sellable ore having a grade of at least 25% zinc, which means that no costly processing to a concentrate is necessary).
Thus, every rock containing less than 25% zinc must be processed to a concentrate after mining, whereupon this concentrate can be sold to smelters. Every rock mineralized with more than 25% zinc is classified as “natural concentrate” and as such does not require any further processing (can be sold directly to smelters). This is the simple but impressive advantage of truly “high grade“ zinc ore with DSO quality, which however has become very rare today. Pasinex and its joint venture partner (Akmetal Mining Inc.; decade long experience as an established miner in Turkey) simply just remove the rock, which is enriched with around 30% zinc, with straightforward mining methods.
Cash is King
Pasinex should release the exact amount of revenue from its first DSO sale soon (estimating around 1 million dollars). This would mean that Pasinex officially became a (profitable) producer generating cash flow on a regular basis, which will be reinvested mainly into mine expansion and exploration. Thus, dilution of existing shareholders is limited. In the next months, production output is planned to be doubled, whereas a tenfold increase is envisioned until 2018. The required investments for such a significant mine expansion should be financed primarily with the permanent DSO sales revenue.
With a current market capitalization of 8 million dollars, Pasinex is in the enviable position to still have much appreciation potential and capable to profit directly from a rising zinc price with leverage. In the last 12 months, its stock gained 167% and thus outperforming the HUI mining index by multiple hundred percent. This is a testament that prospective resource projects can rise against the general trend of collapsing precious metal prices. Experience shows: Where values are created, the valuation of stocks follow accordingly – and independent from the general trend.
Since Pasinex is currently drilling on 2 of its properties, an increased news flow is expected in the upcoming months. By way of regular announcements of profitable DSO sales, Pasinex should successively gain global publicity, because it has become very rare to hear from deposits which can be brought into production that fast, cheaply and successfully – while at the same time calling for attention with such formidable growth perspectives.